Financial Industry Regulatory Authority and Securities and Exchange Commission examiners discovered recurring deficiencies in the timeliness of conflict of interest disclosures, supervisory procedures and advertising issues in recent municipal advisor examinations.
Regulators discussed those findings during an Aug. 13 webinar with the SEC, FINRA and the Municipal Securities Rulemaking Board. Regulators said COVID-19 has changed the way they conduct examinations of MA firms. But Gene Davis, FINRA director of member supervision specialist programs said the pandemic has not slowed the number of exams it conducts.
“We’re still doing the same number of exams, we’re just doing them a little differently,” Davis said. “We’re doing them remotely. We’re using technology for firms to upload documents to use so that we can review them. We will work with firms with whatever needs or challenges that they are seeing in this pandemic.”
Since March, many people are now working from home to stop the spread of COVID-19.
“We are living in uncertain times,” said Ahmed Abonamah, deputy director of the SEC’s Office of Municipal Securities. “A year ago few among us would have predicted that we would be in the midst of a global pandemic and dealing with collateral effects.”
The quality of advice from MAs is as important now as it has ever been, Abonamah added.
Due to the pandemic, Davis expects to do virtual examinations of MA firms for at least the remainder of this year.
Challenges persist — FINRA examiners may request documents from firms that staff may not have access to, such as a single hard copy record.
“In those instances, we’ll work with the firm and there may be another record or something that we can look at that would get us to where we need to be,” Davis said.
Aaron Pabst, senior staff accountant at the SEC’s office in Fort Worth, Texas, said he has experienced a bit of a slowdown, but emphasized it should not affect which firms get examined.
As regulators examine the MA firms, they are finding some common deficiencies — one of the most common is with MSRB Rule G-44, on supervisory and compliance obligations, Pabst said.
The SEC finds about 60% of MA examinations have Rule G-44 deficiencies, Pabst said. Mostly, MA firms need to tighten up their supervisory procedures, he said.
“We’ll look at written supervisory procedures and see what firms state that it will do,” Pabst said. “Then we look to see that they’ve included the things that we hoped they planned to do to supervise appropriately their firms and then we check to see if they’re actually doing those things.”
FINRA also noticed deficiencies with respect to MSRB Rule G-42 on the duties of non-solicitor municipal advisors, specifically with the timeliness of conflicts of interest disclosure letters. Rule G-42 requires MAs to make full and fair disclosure in writing of all material conflicts of interest. Those have to be provided before engaging in MA activities on behalf of a client.
Examiners also found that MAs are frequently not providing complete context in those letters, such as disclosing if the firm is providing other services to the municipal entity.
Davis also found some broker-dealer MA firms will provide advice to an issuer before perfecting exemptions such as if the issuer is relying on the opinion of an independent registered MA, known as the IRMA exemption.
Advertising, though a relatively new rule for MAs, has hit a few bumps as well. Advertising rules require, among other things, that advertisements not be misleading and prohibit MAs from using client testimonials in advertisements.
“We haven’t seen anything underlined that has been particularly nefarious, or something done with intent materially,” Davis said. “Where we have seen the advertising issues has been claims on emails or websites that cannot be substantiated.”
